WASHINGTON – The nation’s debt ceiling once again looms as an economic threat.
The Treasury Department said Wednesday that the U.S. probably will hit its $16.4 trillion borrowing limit by the end of the year, at the same time that Congress will be grappling with the automatic tax increases and large government spending cuts scheduled to kick in Jan. 1.
“It adds to the cauldron of the dark brew,” Mark Zandi, chief economist at Moody’s Analytics, said of the fast-approaching debt limit. “That makes the disaster more disastrous.”
The Congressional Budget Office and most economists predict another recession in 2013 if the confluence of tax increases and spending reductions known as the fiscal cliff takes place.
And straying too close to the debt limit – not to mention hitting it – probably would lead to a second downgrade of the U.S. credit rating. In mid-2011, a bitter standoff over the issue led to the first credit revision.
The Treasury said Wednesday it could take “extraordinary measures” to juggle the nation’s finances to give Congress and the White House more time to work on a debt-limit increase. But even those steps – essentially a series of accounting maneuvers – would buy only into early 2013 before the government faced a possible default.
As of Tuesday, the U.S. debt was $16.165 trillion.
“I think that, as we saw last summer (2011), it’s important that the debt limit is raised in a timely manner, but really that’s in Congress’ hands,” said Matthew Rutherford, assistant Treasury secretary for financial markets.
It was the agreement then to boost the limit that created the $1.2 trillion in automatic spending cuts that are part of the fiscal cliff. The other part is the expiration of the George W. Bush-era tax cuts.
Lawmakers and President Barack Obama will try to deal with the fiscal cliff after next week’s elections. The debt limit will probably be addressed then as well, although it has not yet been the focus of Democrats or Republicans.
House Speaker John Boehner, R-Ohio, said in May that he had a simple principle for raising the debt limit – any increase must be offset “by spending cuts and reforms that exceed the amount of the debt limit increase.”
“No decisions have been made on timing, but the speaker’s principle – that spending cuts and reforms must exceed any debt hike – will have to be met,” Boehner spokesman Kevin Smith said Wednesday.
A White House spokeswoman declined to comment.
Federal Reserve Chairman Ben S. Bernanke and Christine Lagarde, head of the International Monetary Fund, have warned about the negative ramifications for the U.S. and world economies if the debt limit is not raised.
The brinkmanship leading up to the mid-2011 debt limit increase caused Standard & Poor’s to downgrade the U.S. credit rating for the first time, to AA+ from the highest level of AAA.
The Government Accountability Office estimated recently that the delay in getting a debt-limit deal cost taxpayers an additional $1.3 billion in borrowing costs for the fiscal year that ended Sept. 30, 2011.